Depreciation and high costs;

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Accounting Research BULLETINS
Issued by the Committee on Accounting Procedure, American Institute of Accountants 13 East 41st Street, New York 17, N. Y.
Copyright 1947 by American Institute of Accountants
Depreciation and High Costs
The committee on accounting procedure recently author-ized the issuance of a statement to members of the Institute dealing with the propriety of charging to current income (a) amounts in excess of depreciation based on cost of plant facilities to provide for their replacement at higher prices, and (b) a portion of the cost of currently acquired new facili-ties representing part or all of the excess of current construc-tion costs over an estimated "reasonable" cost. The commit-tee now deems it appropriate to issue that statement as a research bulletin. The statement of the committee follows:
1. "The American Institute of Accountants committee on account-ing procedure has given extensive consideration to the problem of making adequate provision for the replacement of plant facilities in view of recent sharp increases in the price level. The problem requires consideration of charges against current income for depre-ciation of facilities acquired at lower price levels.
2. "The committee recognizes that business management has the responsibility of providing for replacement of plant and machinery. It also recognizes that, in reporting profits today, the cost of material and labor is reflected in terms of 'inflated' dollars while the cost of productive facilities in which capital was invested at a lower price level is reflected in terms of dollars whose purchasing power was much greater. There is no doubt that in considering depreciation in connection with product costs, prices, and business policies, manage-ment must take into consideration the probability that plant and machinery will have to be replaced at costs much greater than those of the facilities now in use.
3. "When there are gross discrepancies between the cost and cur-rent values of productive facilities, the committee believes that it is entirely proper for management to make annual appropriations of net income or surplus in contemplation of replacement of such facilities at higher price levels.
4. "It has been suggested in some quarters that the problem be
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December, 1947
No.33